Moody's statement jiggles rand

By Ethel Hazelhurst, Business Report, 13/03/2009

A statement from Moody's Investors Service on Thursday about the ratings of South Africa's foreign and local currency debt caused a 10c decline in the value of the rand. However, the local currency quickly recovered.

Moody's affirmed the positive outlook on the Baa1 foreign currency rating, but placed the A2 local currency rating - a rating on local bonds - on review for a downgrade.

A lower rating will increase the cost of raising funds in global markets.

"The rand lost 10c immediately after the news was released, but later recouped its losses," said John Cairns, a currency strategist at Rand Merchant Bank.

"The initial move was a knee-jerk overreaction."

Ian Cruickshanks, the head of strategic research at Nedbank Capital, described Moody's announcement as a "non-event in the currency market".

The rand ended the day at R9.99 to the dollar, 14.87c firmer than the previous day.

Moody's cited "fiscal pressures" for the review of the government's local currency bond rating.

"While clearly not unique to South Africa in the current global context, the increase in government issuance will probably weaken the government's creditworthiness at the margin," said Kristin Lindow, the regional credit officer for Africa. "The material risk of a prolonged recession could create significant pressures on public finances in light of unsatisfied economic and social demands."

Moody's also referred to the presidential transition, "in the sense that the process has revealed weaknesses in the country's institutions, including the legal framework. Moreover, visibility about potential changes to the established macro policy parameters has been obscured by some of the rhetoric on the subject from the incoming political leadership."

Jean-Francois Mercier, an economist at Citi based in Johannesburg, said: "Normally investors look at the foreign currency rating but a lot of foreign investors hold the local bonds so that would be of concern for them."

The Baa1 rating was assigned in January 2005 from Baa2 and the agency revised the outlook upward from stable to positive in June 2007. The A2 local currency rating was assigned in December 2001.

Lindow said South Africa's current account deficit "is expected to narrow in 2009 as import demand has declined and imported energy costs have fallen precipitously".

The ratings agency forecast recession in South Africa for most of 2009.

But Lindow said the downturn was not particularly relevant to the rating action, since long-term ratings looked through the business cycle.

Lindow added: "The greater concern is the extent to which the current conjuncture weakened prospects for raising the economy's growth potential to the levels that are necessary to address unemployment and to narrow wide income and social disparities.

"There is clear evidence that the electorate is losing patience with the ongoing socioeconomic problems such as poor educational attainment, high unemployment and crime, which may lead to higher government spending in the near to medium term, although positive results cannot be guaranteed."